7 Financial services
| (a)
(31816)
12386/10
+ ADDs 1-2
COM(10) 368
(b)
(31818)
12387/10
COM(10) 369
(c)
(31836)
12346/10
+ ADDs 1-2
COM(10) 371
| Draft Directive on deposit guarantee schemes (recast)
Commission Report: Review of Directive 94/19/EC on deposit guarantee schemes
Draft Directive amending Directive 97/9/EC on investor compensation schemes
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| Legal base | (a) and (c) Article 53(1) TFEU; co-decision; QMV
(b) —
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| Documents originated | 12 July 2010
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| Deposited in Parliament | (a) and (b) 22 July 2010
(c) 21 July 2010
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| Department | HM Treasury
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| Basis of consideration | (a) and (b) EM of 12 September 2010
(c) EM of 17 September 2010
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| Previous Committee Report | None
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| To be discussed in Council | Not known
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| Committee's assessment | Politically important
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| Committee's decision | (b) Cleared, (a) and (c) not cleared, further information requested; Reasoned Opinion on (c) recommended
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Background
7.1 The Deposit Guarantee Schemes Directive, Directive 94/19/EC,
as amended, governs the operation of statutory deposit guarantee
schemes in the European Economic Area, including the UK's Financial
Services Compensation Scheme. The Directive was amended, following
the financial crisis, in March 2009, by Directive 2009/14/EC.
The main change was to increase the coverage level to €100,000
(£83,490) by 31 December 2010 — under the earlier legislation
Member States operated widely differing levels of coverage. When
proposing the 2009 Directive the Commission said it would undertake
a fuller review of the Deposit Guarantee Schemes Directive.
7.2 The Investor Compensation Schemes Directive,
Directive 97/9/EC, ensures compensation for clients receiving
investment services from investment firms (including credit institutions)
in specific circumstances where the firm is unable to return money
or financial instruments that it holds on the client's behalf
because it is in default. Examples of where compensation may occur
are in cases of theft, embezzlement, fraudulent misrepresentation,
unintentional errors, negligence or breakdown in systems and controls.
If the firm is unable to pay compensation itself due to insolvency
national schemes pay compensation on eligible claims. The Directive
does not cover investment risk.
The documents
7.3 The draft Directive, document (a), is to recast,
that is revise and consolidate, the Deposit Guarantee Schemes
Directive, with the aim of improving protection for depositors
and further harmonising the rules governing schemes. The key elements
of the draft Directive are:
- confirmation that coverage
level for deposits will increase to €100,000 from 31 December
2010, when it will become the minimum and maximum level that schemes
can offer;
- Member States outside the eurozone can set a
coverage level in their own currency, equivalent to the value
of €100,000, which can be rounded up by up to €2,500
(£2,087) — at current exchange rates the coverage level
in sterling could be rounded to £85,000;
- review of this level every five years, unless
unforeseen events necessitate an earlier review;
- provision for depositors to be reimbursed within
seven days of the failure of an institution — the current
provision is for reimbursement within 20 working days, plus a
further 10 days in the event of exceptional circumstances;
- depositors would not have to make an application
for reimbursement;
- requirement for deposit takers to inform schemes
early if a failure becomes likely, in order to facilitate the
faster payout deadline;
- requirement for deposit takers to provide information
about the aggregated deposits of a depositor (a so-called 'single
customer view') at any time;
- stipulation that, in order to facilitate the
payout process in cross-border situations, the host scheme should
act as the single point of contact for depositors in a branch
in another Member State — this would include communications
with depositors and paying out on behalf of the home state scheme;
- proposals for the sound financing of schemes
through a four-step approach — they must have access to
a "pre-fund" equivalent to 1.5% of covered deposits
by 2020, if additional funding is needed then members of the scheme,
that is deposit-taking institutions, must pay extraordinary contributions
of up to 0.5% of eligible deposits within seven days of a failure,
a requirement for schemes to lend to each other from 2020 in certain
circumstances and other funding arrangements could be made as
a contingency, such as borrowing from governments;
- deposit takers' contributions to schemes should
be determined by risk-based levies so that contributions reflect
the risk associated with the institution rather than just its
size — the Commission has proposed a formula for calculating
this;
- widening the range of businesses eligible for
deposit protection so that all businesses, apart from financial
institutions, would be covered, not just small and medium-sized
firms;
- giving the proposed European Banking Authority
a role in administrating borrowing and other forms of cooperation
between schemes;
- giving the European Banking Authority and the
European Forum of Deposit Insurers[21]
a role of regularly peer reviewing and stress testing schemes
to ensure that they comply with the requirements of the Directive;
and
- introducing some limitations on the use of a
deposit guarantee scheme's funds for resolution of a failed institution.
7.4 The draft Directive is accompanied by the Commission's
full impact assessment and a summary of the assessment.
7.5 The Commission Report of its review of the Deposit
Guarantee Schemes Directive, document (b), covers those issues
which are not, or not entirely, dealt with by the draft Directive,
document (a). It discusses:
- the appropriateness of a fixed
coverage level of €100,000;
- the appropriateness and arrangements for providing
full coverage for certain temporarily increased account balances;
- the benefits and costs of introducing a pan-European
Deposit Guarantee Scheme;
- harmonisation of the scope of products and depositors
covered, including the specific needs of small and medium-sized
enterprises and local authorities;
- the link between deposit guarantee schemes and
alternative means of reimbursing depositors, such as emergency
payout mechanisms; and
- briefly, the link between deposit guarantee schemes
and the Commission's work on bank resolution.[22]
7.6 The Report is relatively short and the Commission
says that it should be read in conjunction with the draft Directive,
document (a).
7.7 The second draft Directive, document (c), is
to amend the Investor Compensation Schemes Directive. It aims
to:
- increase the protection provided
under the present Directive and strengthen confidence in the use
of investment services;
- address regulatory loopholes and problems experienced
in the operation of national schemes; and
- reflect changes in the regulatory framework,
both as the present Directive was modelled on the Deposit Guarantee
Schemes Directive, which has since been amended and for which
further changes are proposed, as in document (a), and as it complemented
the Investment Services Directive, which has now been replaced
by the Market in Financial Instruments Directive regulating provision
of investment services in the EU.
7.8 The draft Directive would:
- increase the minimum level
of EU compensation payable to investors from €20,000 (£16,350)
to a harmonised minimum and maximum level of €50,000 (£40,875);
- Member States outside the eurozone could set
a coverage level in their own currency, equivalent to the value
of €50,000, which could be rounded up by up to €2,500
(£2,087);
- remove the co-insurance option under which investors
could bear a proportion of up to 10% of the loss within the compensation
limit. Currently, if an investor has an eligible claim for £1000,
they could receive as a minimum £900 compensation, bearing
up to £100, or 10%, of the loss themselves — many Member
States, including the UK, have already removed co-insurance;
- clarify that all core investment activities covered
under Market in Financial Instruments Directive should be subject
to the Investor Compensation Schemes Directive — under the
former Directive not all investment firms are authorised to hold
client assets, but this would extend coverage to all instances
where firms hold client assets, irrespective of whether they have
authorisation to do so;
- extend cover in the case of the default of a
third party custodian resulting in the investment firm not being
able to return the client's assets, given that under the Market
in Financial Instruments Directive investment firms may place
assets with a third party for safekeeping;
- extend cover similarly it relation to the Undertakings
for Collective Investments in Transferable Securities (UCITS)
Directive, an EU harmonised framework for investment funds, which
requires funds to place assets with a depositary for safe-keeping
and allows the depositary to delegate this function to a sub-custodian.
Coverage would be provided to UCITS unit holders if there were
a loss of assets due to the failure of a depositary of a UCITS
scheme or a sub-custodian thereof;
- require schemes to build up a pre-fund for 0.5%
of the value of the investments covered in the ten years following
implementation of the Directive;
- ensure an additional 0.5% annual levy if the
pre-fund is insufficient (unless this jeopardises the stability
of the financial system of the Member State);
- provide for access to alternative short-funding
arrangements on a commercial basis;
- provide for a borrowing mechanism between national
schemes — Member States would have to make 10% of their
pre-fund available for lending to other schemes, but a scheme
could only borrow up to 20% of the total amount of monies available
in each instance, borrowed funds would only be used to pay Investor
Compensation Schemes Directive compensation, the proposed European
Securities and Markets Authority would confirm that these requirements
were met and state the amounts to be lent by each scheme, which
would be in proportion to the amount of the covered investments,
and loans would be repayable within five years and would accrue
interest at the European Central Bank's rate for its marginal
lending facility;
- provide for partial payouts to be made if claims
are not settled within nine months of the determination of default;
and
- provide for investors to receive more detailed
information about what is covered and not covered under compensation
schemes.
7.9 The draft Directive is accompanied by the Commission's
full impact assessment and a summary of the assessment.
7.10 The Commission has also published at the same
time as these documents a White Paper on insurance guarantee schemes,
which is the subject of another chapter in this report.[23]
The Government's view
7.11 In relation to the draft Directive to recast
the Deposit Guarantee Schemes Directive, document (a), the Financial
Secretary to the Treasury (Mr Mark Hoban) tells us that the Government
believes that compensation plays a vital role in ensuring ongoing
depositor confidence and that recent events have highlighted the
importance of this. He comments that the UK's Financial Services
Compensation Scheme leads the way in the EU and already goes further
in many areas than required by the current Directive, such as
aiming to pay out within seven days, implementing single customer
view and having the capacity to pay out on behalf of another scheme.
He says that the Government therefore fully supports the principle
of improving EU-wide depositor protection by raising minimum standards
of deposit guarantee schemes across the EU, but that it would
not support further EU harmonisation if this led to a reduction
in protection currently offered to UK depositors.
7.12 In more detailed comments the Minister says
that:
- the Government supports the
proposals to provide a harmonised coverage level at €100,000
(£83,490) and current provisions for non-euro countries to
convert the coverage level to their own currencies;
- its preference is for a round sterling coverage
limit, which at current exchange rates could be set at £85,000
in order to ensure consumer certainty;
- the new coverage limit increases protection for
depositors and provides a level playing field for financial institutions
across the European Economic Area;
- the Government supports proposals for better
stress-testing of schemes, transparency and peer review in line
with its objective with securing well-functioning schemes, with
streamlined payout procedures;
- it plans to seek important improvements during
Council working group negotiations to ensure that the proposed
Directive avoids imposing unnecessary burdens on the UK financial
services industry, while at the same time delivering improvements
to depositor protection and consumer confidence;
- it is currently considering the implications
of the Commission's funding proposals and will take account of
their impact on the Financial Services Compensation Scheme, on
industry and the implications for consumers;
- the Commission's proposal for requiring schemes
to lend to one another could have fiscal consequences for national
governments and raises questions about how mutual borrowing would
work in practice — the Government does not believe that
it is appropriate to introduce mandatory mutual borrowing at this
stage;
- the Government supports faster payout for depositors
— the Financial Services Compensation Scheme currently aims
to compensate the majority of depositors within seven days of
the failure of an institution;
- the Government will seek to ensure that the proposed
Directive sets payout deadlines that are realistically achievable
for schemes and will push for exemptions where seven-day payout
is not possible; and
- it will protect the Financial Services Compensation
Scheme's existing capacity to participate in resolution activities.
7.13 The Minister makes no comment on the policy
implications of the Commission Report of its review of the Deposit
Guarantee Schemes Directive, document (b).
7.14 On the second draft Directive, document (c),
to amend the Investor Compensation Schemes Directive, the Minister
first sets out a Government stance that is very similar to that
in relation to the other draft Directive, document (a):
- compensation plays a vital
role in ensuring ongoing investor confidence and that recent events
have highlighted the importance of this;
- the Financial Services Compensation
Scheme leads the way in Europe and goes further in many areas
than required by the proposed Directive, such as covering losses
resulting from breaches of conduct of business requirements and
by providing a higher compensation limit;
- the Government therefore fully supports the principle
of improving EU-wide investor protection by raising minimum standards
of investor compensation schemes across the EU; and
- it would not, however, support further EU harmonisation
if this led to a reduction in protection currently offered to
UK investors.
7.15 The Minister then tells us that the Government
supports the principle of updating the Investor Compensation Schemes
Directive in the light of changes in the past thirteen years,
although it plans to argue for continued national discretion in
the operation of compensation schemes. He says that the Government
will seek important improvements to the draft Directive during
Council negotiations to ensure that it avoids imposing unnecessary
burdens on the EU investment industry, while at the same time
delivering improvements to investor protection and confidence.
7.16 Elaborating on this the Minister first discusses
detailed funding requirements, saying that:
- the Government will argue
for a more proportionate approach that recognises that member
States are best placed to ensure schemes are able to meet their
obligations;
- although discussions on pre-funding within the
deposits sector are more advanced, unlike deposits, which are
used by the depositor to live on and to pay day-to-day bills,
investments are used for longer term capital accumulation and
so the argument for pre-funding the investment sector is weaker;
- there remain arguments supporting the introduction
of pre-funding, including that the "polluter pays" and
that it is countercyclical; and
- disproportionate levels of pre-funding would
take away large sums of investor money, affecting investors through
reduced investment returns, without increased protection.
7.17 On mutual borrowing, the draft Directive provisions
allowing a national scheme to borrow from other national schemes
if they have exhausted their pre-fund and additional levies, the
Minister says that the Government has strong reservations about
these requirements and will work closely with other Member States
to argue for their removal. He notes particularly the provisions
could impact Member States that provide backing to their schemes.
7.18 In relation to cover for default of third parties
and UCITS depositaries the Minister comments that:
- while the draft Directive may
provide increased investor protection, it is important that it
takes into account decisions to be made during forthcoming work
on UCITS with respect to depositaries and liability; and
- discussions on extending compensation to loss
by depositaries of UCITS should be informed by negotiations on
UCITS depositaries, which are due to start at the beginning of
2011;
- it is unclear why the proposals cover UCITS depositaries
but not UCITS management companies, which are covered in the UK
by the Financial Services Compensation Scheme.
7.19 Turning to compensation limits the Minister
notes that the draft Directive would require the UK to reduce
its compensation limit from £50,000 to £40,875 (before
rounding) and says that:
- the Government believes that
Member States should be free to set higher compensation limits
in recognition of differences between Member States in terms of
their investment markets;
- it would, however, support increasing the minimum
compensation limit across the EU above €20,000; and
- it seeks to ensure that requirements for partial
compensation payments do not lead to legal and practical difficulties,
and unnecessary costs in reclaiming partial compensation paid
out on invalid claims.
7.20 The Minister concludes that the Government's
overarching objective is to ensure the draft Directive affords
an appropriate level of protection to retail investors without
placing unnecessary burdens on firms or disproportionately affecting
investor returns.
7.21 The Minister tells us that the Government is
liaising with affected stakeholders to give them an opportunity
to share their views on the two draft Directives. On the draft
Directive to recast the Deposit Guarantee Schemes Directive, document
(a), the Financial Services Authority will be consulting on changing
the coverage level to €100,000 (£83,490) later in the
year. On the other draft Directive, document (c), the Government
hopes gain a more developed understanding of the cost impacts
of the proposal. In relation to the Commission's impact assessments
the Minister says, for the first draft Directive, document (a),
that the Government will seek further information on the impacts
for UK firms and continue to consider the impact of the proposal
throughout negotiations. On the second proposal, document (c),
the Minister notes that the draft Directive has significant potential
regulatory impacts and that the Commission's assessment does not
include a specific estimate of the costs to industry or the effect
these proposals would have on investment returns for investors.
He says that, as part of the consultation process, the Government
is seeking further information on the likely impacts from UK firms
and will produce an impact assessment using this information.
Subsidiarity
7.22 We are concerned that the provisions in the
draft Directive to recast the Deposit Guarantee Schemes Directive,
document (a), and the draft Directive to amend the Investor Compensation
Schemes Directive, document (c), to allow a scheme to require
support from schemes in other Member States may not accord with
the principle of subsidiarity. Such provisions risk introducing
moral hazard. That is a scheme could undertake inappropriate,
careless or risky action because it was relying on a fail-safe
mechanism. To avoid introducing moral hazard it would be better
not to have recourse to other Member States' schemes, but to have
each Member State ensure that members of a scheme take full responsibility
themselves. In other words the draft Directives, would not, as
they stand in relation to this aspect of the proposals, produce
a result that was, in the words of Article 5 TEU, "better
achieved at Union level" and therefore do not meet the principle
of subsidiarity.
7.23 We understand that Sweden's Riksdag has taken
a similar view of the two draft Directives and has submitted Reasoned
Opinions to this effect under Protocol No 2 to the TEU and the
TFEU. We understand also that Germany's Bundesrat and Bundestag
may also offer a Reasoned Opinion on the draft Directive to recast
the Deposit Guarantee Schemes Directive. The reasons for our view
are set out in the Annex to this chapter.
Conclusion
7.24 We clear the Commission Report of its review
of the Deposit Guarantee Schemes Directive, document (b), from
scrutiny. As for the two draft Directives, documents (a) and (c),
whilst we note the Government's support in principle for the proposals
we will wish to consider the documents further in the light of
information we should like to have from the Government about progress
in negotiating the problems it has identified to us, about the
outcome of its consultations and about any impact assessments
it develops. Meanwhile the documents remain under scrutiny.
7.25 As for subsidiarity, the deadline for submission
on a Reasoned Opinion of the draft Directive to recast the Deposit
Guarantee Schemes Directive, document (a), has expired. So our
Chairman will write to the presidents of the three EU institutions
concerned to draw their attention to our view. However the deadline
for a Reasoned Opinion on the draft Directive to amend the Investor
Compensation Schemes Directive, document (c), does not expire
until 25 October 2010 and a draft Reasoned Opinion to be submitted
by the House of Commons is contained in the Annex. So we invite
the House to agree a resolution in the following terms:
"That this House considers that the draft
Directive to amend the Investor Compensation Schemes Directive
does not comply with the principle of subsidiarity, for the reasons
set out in the Annex to chapter 7 of the Third Report of the European
Scrutiny Committee (HC 428-iii); and in accordance with article
6 of the Protocol on the application of the principles of subsidiarity
and proportionality, instructs the Clerk of the House to forward
this reasoned opinion to the presidents of the European institutions."
7.26 In view of the proximity of the 25 October
deadline, we request that the above Motion be taken on the floor
of the House and not debated in a European Committee.
Annex
Draft Reasoned Opinion
of the House of Commons
7.27 Submitted to the Presidents of the European
Parliament, the Council and the Commission, pursuant to Article
6 of Protocol (No 2) on the Application of the Principles of Subsidiarity
and Proportionality
Draft Directive amending Directive 97/9/EC
on investor-compensation schemes (12346/10)
Relevant Treaty provisions
1. Article 5(3) of the Treaty on European Union
(TEU) states:
"Under the principle of subsidiarity, in areas
which do not fall within its exclusive competence, the Union shall
act only if and in so far as the objectives of the proposed action
cannot be sufficiently achieved by the Member States, either at
central level or at regional and local level, but can rather,
by reason of the scale or effects of the proposed action, be better
achieved at Union level.
"The institutions of the Union shall apply the
principle of subsidiarity as laid down in the Protocol on the
application of the principles of subsidiarity and proportionality.
National Parliaments ensure compliance with the principle of subsidiarity
in accordance with the procedure set out in that Protocol."
2. Article 12(b) TEU further states that:
"National Parliaments contribute actively to
the good functioning of the Union [...] by seeing to it that the
principle of subsidiarity is respected in accordance with the
procedures provided for in the Protocol on the application of
the principles of subsidiarity and proportionality".
Aspects of the Directive which do not comply with
the principle of subsidiarity
3. The House of Commons considers that the draft
Directive amending Directive 97/9/EC on investor-compensation
schemes does not comply with the principle of subsidiarity in
the following respect: the borrowing last resort mechanism between
national schemes in Article 4b does not fulfil an objective that
can "be better achieved at Union level".
Reasons
4. In its explanatory memorandum, the Commission
gives the following justification for establishing a last resort
borrowing mechanism between Member State investor-compensation
schemes:
"Together with the establishment of consistent
funding rules between Member States, the introduction of cooperation
arrangements among national schemes will provide greater protection
to investors and promote investor confidence in investment services.
"The system is based on the principle of solidarity
between the national schemes. According to the proposed Article,
a borrowing mechanism among schemes is introduced as a last resort
tool.
"These measures should provide schemes with
an alternative back up source of funding, under specific conditions
and on a temporary basis. They will also facilitate a closer relationship
and better on-going coordination between national schemes and
will act as an incentive to develop more harmonized practices
and working procedures."
5. The Commission explains that national "schemes
should have the right to borrow from the other schemes if their
funds are insufficient to cover their immediate needs", and
that "a portion of ex ante funding in each compensation scheme
will have to be available for lending to other schemes."
6. The House of Commons considers it likely that
the primary objective of the borrowing mechanism — "to
provide greater protection to investors and promote investor confidence
in investment services" — will not be achieved. This
is because such a mechanism could introduce moral hazard in investment
services, the logic being there is a higher risk of a national
scheme underwriting inappropriate, careless or risky investments
when it knows that it can rely on a back-up source of credit.
The House of Commons considers that neither the assessment of
borrowing requests by the European Securities and Market Authority
nor the obligation to repay the loan within five years will mitigate
this risk.
7. To avoid introducing moral hazard it would be
better not to have recourse to other Member States' schemes, but,
consistent with the principle of subsidiarity, for each Member
State to ensure that members of the investor-compensation scheme
take full responsibility themselves. Like Sweden's Riksdag the
House of Commons considers that, in order to achieve investor
protection and confidence, there must be an incentive for compensation
schemes of this kind to be adequately funded at national level;
and it must be for central governments to ensure that an investor
compensation scheme can fulfil its commitments. In addition, the
House of Commons considers that, as a general rule of investment,
risk should be guaranteed where it arises because that is where
it is best assessed and where action may be taken in relation
to it.
8. In light of the observations above, and in the
absence of qualitative and quantitative indicators provided by
the Commission to the contrary, the House of Commons cannot see
why, by reason of its scale or effects, action by the EU in the
form of the compulsory borrowing mechanism, as opposed to separate
action by Member States, would better fulfil the objective of
giving greater protection to investors and promoting confidence
in investment services. On the contrary, the proposed borrowing
mechanism may lead to less protection for investors and less confidence
in investment services. This aspect of the draft Directive would
not therefore produce a result that was "better achieved
at Union level" and does not comply with the principle of
subsidiarity.
21 See http://www.efdi.net/aboutUs.asp. Back
22
(31646) 10394/10: see HC 428-i (2010-11), chapter 70 (8 September
2010). Back
23
(31843) 12360/10 + ADDs 1-8: see chapter 8. Back
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